Kim Jong il death adds uncertainty for Asia funds

NishaGopalan

Fund flows into Asia--already down as investors adopt a cautious tone towards emerging markets--are set to be hit further as the death of Kim Jong Il adds a layer of uncertainty to a weak global economy.

According to the latest data from EPFR, equity funds globally were set back by net outflows of $9.5 billion in the week to Dec. 16--the fourth straight week of net redemptions--as investors soured on any quick resolution to the euro-zone debt crisis.

Hurt by weak sentiment over Europe, as well as fears of a Chinese economic slowdown, Asia ex-Japan equity funds saw the biggest outflows in dollar terms as investors pulled money out for the 17th time in the past 19 weeks, with China equity funds experiencing net redemptions for the fourth week running, according to the data provider.

"Markets hate uncertainty and Kim Jong Il's death adds uncertainty to an already uneasy global economy," said Keith Ducker, San Francisco-based chief investment officer at technology operator TORA, which has dark pools. "Instability in North Korea leadership would clearly be a negative for Asia investment especially heading into the first quarter as investors evaluate which regions to overweight or underweight in 2012."

Olivier d'Assier, Singapore-based managing director for Europe and Asia at Axioma, which provides risk models for equity investors, said he is monitoring to see if South Korean stocks are "de-correlated" from the rest of the region on this news in coming days.

"This was not an unexpected news and the succession plans have been known for some time," said d'Assier. "I believe the markets will take a wait-and-see attitude to this event with investors preferring to watch as the execution of the succession plans unfolds for signs of potential changes."

Asian fund managers moved into high-yield fixed-income assets as safe-haven investments amid volatile markets in November, according to a poll by Dow Jones Newswires recently. The poll showed investors increased their weighting on global bonds to "slightly overweight" from "neutral" in October but remained "slightly underweight" on both cash and equities. Data from Nomura showed that for the year to the first week of December, Asia ex-Japan saw US$14.45 billion in net outflows from mutual funds as investors sold what they saw as high-risk assets, while outflows from developed Europe were US$4.5 billion, and that from the U.S. US$4.4 billion.

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